The Supreme Court ruled Monday that NextWave Telecom Inc. could keep licenses to wireless airwaves worth billions of dollars despite its failure to pay for them -- a decision that could improve cellular phone service and lower prices by unlocking a huge swath of spectrum for commercial use.
In an 8-1 decision, the high court upheld a federal appeals court decision that found the Federal Communications Commission violated bankruptcy law two years ago when it repossessed NextWave's licenses and resold them to Verizon Wireless Inc. and 19 other rivals. The agency acted after NextWave failed to pay the federal government $4.7 billion and sought federal bankruptcy protection in 1998.
The ruling -- the third major rebuke of the FCC by the federal courts in the last two years -- paves the way for NextWave to enter the highly competitive mobile phone market, whose 130 million subscribers are now served by six major carriers.
NextWave has said it would compete against established carriers by offering wireless data service, a market that rivals have had difficulty exploiting because of consumer resistance to high prices and the difficulty of fielding e-mail and other wireless data on tiny phone keypads.
The decision also will benefit the 20 mobile phone carriers that had offered $16 billion for NextWave's 100 licenses.
They had been carrying the payments on their books as a financial liability while the NextWave case wound its way through the courts.
Major cell phone operators, such as Verizon Communications Inc. and Deutsch Telekom's T-Mobile USA Inc. (formerly VoiceStream USA), have been eager to acquire new wireless airwaves to avert an erosion in the quality of cell phone service, which has been plagued by dropped calls and poor transmission quality.
"This is a big win for consumers," said Blair Levin, a former FCC chief of staff who is now a financial analyst for investment firm Legg Mason Wood Walker Inc. "The government and NextWave share a common interest in getting the spectrum into use quickly. And I think the result will be improved service -- fewer dropped calls and better-quality calls. Improving these are key for the industry."
In 1996, Hawthorne, N.Y.-based NextWave bid $4.7 billion for 100 wireless licenses set aside for budding telecommunications entrepreneurs, many of whom teamed with established companies such as AT&T; Corp. to raise money to bid on the airwaves.
But, going it alone, NextWave defaulted on its payments, prompting the FCC to confiscate NextWave's licenses and re-sell them to Verizon Wireless, VoiceStream Wireless and other companies for nearly $16 billion at the height of the wireless phone frenzy. The bidders never took control of the airwaves because of the bankruptcy dispute, and the FCC decided last year to let them cancel licenses and get their deposits back.
Writing for the court, Justice Antonin Scalia said the FCC could not justify its actions because the plain language of federal bankruptcy law prohibits the FCC from taking back NextWave's licenses, regardless of how the company's failure to pay might impede the government's plan to put the spectrum into use.
The decision is the latest legal setback for the FCC, which has seen the federal courts overturn an agency ban on companies owning cable TV stations in a market where they own broadcast stations. The courts, in the last two years, also have questioned the agency's rules on media ownership and local phone competition and ordered the FCC to revise them.
A chagrined FCC Chairman Michael K. Powell, who had appealed the NextWave case to the Supreme Court in hopes of a reversal, said the commission will move quickly to get the wireless spectrum into service. Putting a positive face on the ruling, Powell said the court's decision eliminated a cloud of uncertainty that had hung over the industry.
NextWave said in a statement that it was "extremely pleased" with the court decision and looked forward to becoming the country's seventh nationwide mobile phone operator. Company executives did not elaborate on their plans, but many analysts believe NextWave will take on partners or sell or lease its licenses and pocket the proceeds.
Potential bidders Verizon and Cingular Wireless declined to comment Monday. AT&T; did not return phone calls.
If NextWave chooses to sell the licenses, experts say they probably will fetch less than half the $16 billion rivals paid two years ago. That's because cell phone subscriber growth has slowed. Most consumers who want a mobile phone have one. The remaining 50% of Americans who don't have one are mostly the elderly, the poor and children too young to own a phone.
What's more, carriers have compounded their woes by following in the footsteps of dot-com and fiber-optic entrepreneurs, borrowing too heavily and building too aggressively in the face of slowing demand. The number of mobile phone subscribers rose just 14% last year -- an all-time-low rate, according to Prudential Securities Inc.
At the same time, revenue per minute of mobile telephone use has plummeted to 14 cents from 53 cents in 1992.
Before it does anything with the licenses, NextWave must first complete its Chapter 11 financial reorganization, a process that could take several months. Then, the company probably will huddle with FCC officials to determine whether the agency will hold NextWave to a construction schedule that requires the company to offer wireless service to 30% of the country within five years.
An FCC official insisted Monday that NextWave will not get any special dispensation despite the court victory.
"We have a rule -- and it is for everybody -- and that rule is that you have to serve one-third of the population within five years of getting your license," said the official, who spoke on the condition of anonymity. NextWave can sell its licenses, but the timetable would apply to any buyer.
If compelled to immediately build out a new wireless network, NextWave probably will encounter a chilly reception from investors, who have watched the telecommunications sector lay off hundreds of thousands of workers and lose $2 trillion in market value in the last 30 months.
With less business to go around, experts predict the industry will shrink to no more than four major players within two years.
Roger Entner, an analyst for research firm Yankee Group in Boston, said wireless "subscribers have slowed down and so you don't have this ... gold rush mentality."